Hello everyone and welcome back. Today I want to share with you what is hands down the most important trait a stock market investor should posses. It is not a super sharp mind, neither is a super savvy approach, but it is … Discipline.
Yes that’s right – discipline discipline and again discipline. The biggest example for that is of course Warren Buffett. In his career he never ran with the crowd to buy companies which have been running up like crazy the last couple of years, neither he ever bought ‘the next big thing’. He never invested in Bitcoin, Microsoft, Amazon,Netflix or any big success story. He even completely missed the whole tech revolution and is not even ashamed of that- he honestly admits it and carries on investing in what he knows about with his methodological discipline.
He metodically invested in undervalued boring companies year after year after year. And while a lot of people have come and gone from the markets he carries on making money day in and day out.
So let me explain why that is not so easy as it sounds and why not everyone is Warren Buffet. First people are greedy – when they see a company going up in value exponentially they want to get a piece of that pie and see their money going up like this. They want that so much that they forget about discipline, forget about research, forget about fundamentals and just blindly go with the greed and wait for the big returns. And of course when fundamentals are not intact sooner or later everything falls apart and you finally see the real picture – when it’s too late.
That is when the discipline comes in. When a disciplined investor sees the price of a stock going up a bit too much – he checks the fundamentals. And the most of the cases he finds that something smells fishy. For example the huge run of companies like Netflix or Nvidia. While both are amazing companies and I am a customer of both a disciplined investor would have seen the difference between fundamentals and reality. And sooner or later fundamentals and reality come back together.
So then we go to the second part of the discipline equation – you lack the discipline and invest in Nvidia for example in the very top of the stock price. But the you see the price drop by 60% and you sell again because of that same lack of discipline.
This trait goes in both ways – both for buying and for selling. Remember that every stock goes down including the ones that Warren Buffett holds. But as he posseses that discipline he just keeps buying as the price goes down and sees his money increasing as his actions are based on fundamentals and not on greed.
So it’s easier said then done but how can someone train his discipline ?
So first thing is make a watchlist of companies that you truly believe in for the long term. As I said – a watchlist. Don’t just go and start buying companies just because someone told you to do so – that is not very disciplined. So you make your watchlist. Then for all of these companies write down a price for how much would you buy in. But instead of a price in $ write down a price in P/E – price to earnings. If you dont know what a P/E is just google it – you would find tons of information about it. And to find the P/E of a company just open Yahoo finance or similar and write down the company name there. You will see tons of stats about the company where you can research better. As a rule of thumb about 15 is considered to be the median PE ratio of the S&P500. I consider any PE of over 20 to be excesive. Of course there are exceptions , but you are going to understand more about them with experience.
Ok so you have chosen Nike for example – a company you believe in and would be comfortable holding for the long term. So you go in Yahoo , check their PE and find out its a whopping 54 ! So that is where the discipline comes in – instead of just buying it like a kid infront of an ice cream store you place it on your watchlist and wait. Maybe you wait for 5 months, maybe you wait 2 years, maybe you wait 2 weeks – you cannot know. You only know that this way you have a Strategy and you are in control. Otherwise the stock market is in control of you and you are going to be the victim at one moment or another.
And just to be clear a stock research takes much more than just one metric, but I am giving that as an example so you can understand the difference between rational and irrational stock buying and the difference between discipline and the lack of one.
Hope I have helped you to understand the crucial trait that is the discipline not only in the stock market but in life in general. It is not an easy thing to master, but it is very very rewarding. That is all from me today and hope I have brought you atleast one step closer to where you want to be.
If you have any questions don’t hesitate to contact me on the contact form in the website – I am always happy to help you .